Sector of Natural gas Martin Jirušek, PhD. Natural Gas in US – A History • Known from the times of the first settlers – no major use • 1st gas well 1821(1825?) – Fredonia, NY - Col. Drake also hit gas reservoir as he was drilling for oil in Titusville - Pipeline from this field was supplied to nearby settlements • The first gas well was drilled into shale formation (!) • Fredonia Gas Light Company 1857 – 1st gas company in the US • Limited use within a close distance to wells - limited means of transport 2 3 4 Natural Gas in US – A History • Natural gas was closely bound to the oil industry -By-product of oil extraction – associated gas, usually burned (flared) (gas flare) -NW of the US • The associated (petroleum) gas initially covered the rather limited demand • Extraction of non-associated gas started later • Temporarily used for lighting 5 Natural Gas in US – A History • 1854 – Bunsen burner -enabled use of gas for cooking and heating • Complicated transportation - 1891 first long-distance gas pipeline • Used in close proximity to gas wells • Coordinated building of pipelines since 1920s • The need for infrastructure limited the development, so did the lack of storage capacity 6 Natural Gas in US – A History • Highly concentrated sector – early 1900s • Rockefeller as an important player – owned significant part of transportation • Partitioned market – situation cemented by major players´ unwillingness to develop infrastructure and interstate transportation -Transborder tariffs + rigid infrastructure prevented the market from developing • Public opposition against market concentration – previous experiences with industrial trusts • Efforts to regulate prices on federal level unsuccessful • Natural Gas Act of 1938 – regulation of prices charged on interstate transport 7 General Remark on Natural Gas Sector • Limited means of transport • Requires high initial investments • Investors seek for return of their initial investments • Market naturally tends to be partitioned (due to above mentioned reasons), at least at the beginning • Partitioning of a market and aiming to the highest capitalization possible – a common strategy in the sector 8 Natural Gas in US – A History • The development of pipelines was spurred after the WW I, WW II until 1960s -the pipeline construction expanded thanks to improved technology of welding -gas used for heating and cooking • Natural gas extraction expanded to the South and Southwestern part of the US (the Gulf of Mexico) • Market regulation on a federal level • Use of natural gas in decline in 1960s and 1970s – electric appliances • Increase in late 1970s, early 1980s, mainly due to -Oil shocks – demand for substitute sources -Tightening environmental measures -Cold winters in the late 1970s 9 Natural Gas in US – A History • However, demand was still rather low – economic downturn, nature of contracts, high prices (offsetting high initial costs) • Deregulation in 1980s and early 1990s – weakened the influence of federal government -Supply shortages indicated that regulated sector struggles to serve all customers adequately -Deregulation spurred competition and development -Abolition of T-o-P contracts (1984 by FERC) • Unbundling – the choice of free selection of supplier (not bound to a specific transporter or storage capacity owner) – 1992 by FERC • Interstate affairs (transit, storage, wholesale/interstate market) – FERC • Intrastate (storage, LNG, distribution, retail) - state 10 Natural gas in the US TPES 11 Natural Gas Infrastructure 12 Gas Power Plants 13 Major Shale Gas Plays in the US 14 15 16 Natural gas Trade 17 Natural Gas in the US - Expectations vs. Reality • Significant decrease of domestic production in 1980s and 1990s signaled future need for imports • Decrease of imports from Canada and Mexico • Increase of LNG imports (10% annually) • Expectations that the US will become the biggest importer of LNG Vs. • In mid 2000s a major turnover took place – ‘The Quiet Revolution’of shale gas • US as the world´s biggest shale gas producer • LNG demand fell to 0 • The trend was reversed, USA among the biggest gas producers and exporters 18 ‘A Quiet Revolution’ • Advent of natural gas extracted from unconventional sources (plays) - mostly shale • Combination of two known technologies – horizontal drilling and hydraulic fracturing • Both known technologies, their combination became economically viable thanks to the economy of scale and technological advancements and optimization • Rapid increase of prices in 2005 ignited the ‘revolution’ (2002 USD 4/MMBtu vs. 2005 USD 9/MMBtu) 19 ‘A Quiet Revolution’ • Activities ignited by ‘independents’, mid-sized and big players joined later • The revolution has not been replicated in other parts of the world (S America, Europe) despite large worldwide reserves • Steep increase of estimated resources/reserves • Substantial impact on energy sector/electricity generation – competing with traditional/base-load sources (coal, nuclear), beneficial in terms of emissions • Changes in US position on global level in energy trade 20 21 ‘A Quiet Revolution’ ̶ Caused and accelerated seminal shifts in the energy sector ̶ GDP growth and GHG emissions have decoupled thanks to additions of gasbased power generation (coal - gas swap) ̶ Put a pressure on dirtier and less profitable sources of (electric) energy – mainly coal and nuclear ̶ Discussion about environmental impacts has shifted – from impacts of fracking to emission footprint and climate change in general ̶ methane leakage World Shale Gas Resources 22 US Natural Gas Sources – A Prediction 23 24 Natural gas and LNG 25 US in A New Position • Predictions of massive increase of LNG imports until cca 2007 • Applications to build LNG import terminals • The quiet revolution changed the situation • Abundance of natural gas, demand for imported LNG decreased to 0 • Qatari gas redirected • The advent of unconventionals affected the whole energy sector • US among the top world´s producers • 2018 first whole year of US as a net gas exporter • From a major prospective importer to a major prospective exporter • Determining factors -oil price -export infrastructure – parts of infrastructure already built – still a comparative advantage US LNG Exports • Delusional image of gas prices on the US level – production costs + price of liquefaction + transport + regasification • CEE: perceived as a mitigation of dependence on Russian supplies -Economy? Infrastructure? Sufficiency? • Potentially beneficial for gas prices -Puts a pressure on landfall markets • LNG exports to Europe would obviously benefit from a FTA • TTIP negotiated between2013 – 2016 (stalled) • Unclear outlook amid current tense economic relations 26 27 US LNG Exports •LNG export application proces • A) FTA countries - routinely processed without delays • B) No FTA countries - more scrutiny, proof of ‘public interest’ required -Permission process has been streamlined as a result of pressure by exporters -Timeframe limited to 45 days -The ‘ end use’ reporting provision softened 28 US LNG Exports – operating terminals • LNG terminals • Kenai (AK) – operating • Sabine Pass (LA) – operating • Cove Point (MD) – operating • Corpus Christi (TX) – operating • Cameron (LA) – operating • Freeport (TX) – expected in Q3-Q4/2019 • Elba Island (GA) – delayed 29 US LNG Exports – Terminals Approved/Under Construction 30 US LNG Exports – Terminals Proposed 31 LNG Import Terminals ̶ Under construction: 0 ̶ Approved: 3 ̶ Proposed: 1 Destinations of US LNG Exports ̶ Europe, Mexico – top destinations for short-term/spot contracts ̶ LNG prices have been converging, market is getting flexible ̶ SE Asia – top destination for long-term contracts ̶ Long-term contracts dominate (mainly due to cost returns) ̶ Competing suppliers coming in SE Asia (Australian LNG) ̶ US exporters still falling behind ̶ Top destinations: ̶ S. Korea ̶ Mexico ̶ Japan ̶ China 32